Rights issue
Not what you're looking for?
Suppose that the company was also considering structuring the rights issue to allow for an additional share to be purchased for 10 rights at a subscription price of $3. Prove that a stockholder with 100 shares would be indifferent between purchasing a new share for 10 rights at $3 or purchasing a new share for 20 rights at $6.
---
Back ground information
1. Jelly Beans, Inc., is proposing a rights offering. There are 100,000 outstanding shares at $25 each. There will be 10,000 new shares issued at a $20 subscription price.
a. What is the value of a right?
Value of a right = difference between the old share price and the new share price = $25.00 - $24.55 = $.4545 or $.45
b. What is the ex-rights price?
Ex-rights price = ($25 X100,000) + ($20 X 10,000)
110,000 (total shares)
= $2,500,000 + $200,000 = $24.5454... or $24.55
110,000
c. What is the new market value of the company?
The market value is the number of shares times the market price.
110,000 X $24.5454... = $2,699,994 or $2,700,000
d. Why might a company have a rights offering rather than a common stock offering?
Offering rights rather than common stock will reduce issuance costs and they also offer shareholders more flexibility. They can be exercised or sold.
2. Suppose that the company was also considering structuring the rights issue to allow for an additional share to be purchased for 10 rights at a subscription price of $3. Prove that a stockholder with 100 shares would be indifferent between purchasing a new share for 10 rights at $3 or purchasing a new share for 20 rights at $6.
---
Purchase this Solution
Solution Summary
The solution proves that a stockholder with 100 shares would be indifferent between purchasing a new share for 10 rights at $3 or purchasing a new share for 20 rights at $6.
Solution Preview
2. Suppose that the company was also considering structuring the rights issue to allow for an additional share to be purchased for 10 rights at a subscription price of $3. Prove that a stockholder with 100 shares would be indifferent between purchasing a new share for 10 rights at $3 or purchasing a new share for 20 rights at $6.
No of outstanding shares= 100,000
Current Mkt price of shares= $25.00
a) Additional shares to be purchased for 10 rights
No of additional shares ...
Purchase this Solution
Free BrainMass Quizzes
Marketing Research and Forecasting
The following quiz will assess your ability to identify steps in the marketing research process. Understanding this information will provide fundamental knowledge related to marketing research.
Lean your Process
This quiz will help you understand the basic concepts of Lean.
Introduction to Finance
This quiz test introductory finance topics.
Academic Reading and Writing: Critical Thinking
Importance of Critical Thinking
Change and Resistance within Organizations
This quiz intended to help students understand change and resistance in organizations